Network marketing, also known as multi-level marketing or MLM, is a business model that combines direct retail marketing with a salesforce of independent contractors. Network marketing is an alternate channel for a manufacturer or retailer to advertise, sell and deliver its products to market. Other channels may include retail storefronts, catalog shopping, and door-to-door sales.
Network marketing businesses usually function by enrolling unsalaried salespeople, also known in the business as “Independent Distributors,” “Independent Business Owners,” “Sales Consultants,” etc., (hereinafter “Independent Distributor”) to sell products and earn additional sales commissions based on the sales of people recruited into their downline. A downline may include direct recruits, recruits' recruits and so on such that there may be multiple levels of people receiving commissions from one person's sales.
Network marketing offers several advantages over the other retail channels such as low advertising overhead. Unlike a typical retail company, the network marketing company doesn't have to spend large amounts of money to obtain customers. Instead, it pays Independent Distributors to expose and promote the product out into the marketplace. In addition, the company only has to pay the Independent Distributor a percentage commission on products actually sold.
In a traditional network marketing organization, Independent Distributors are rewarded for the sales they create, not only directly, but indirectly as well. Independent Distributors earn profit from any retail sales they make, plus they also may earn a bonus or override on the sales made by people they recruited into the company, and the people they recruited, and the people they recruited, etc. By getting a small percentage from many people, an Independent Distributor's income can grow to a very large number.
Over the years, companies have developed a variety of network marketing compensation plans. Some of these may include breakaway, uni-level, stairstep or step-level, binary, matrix, or hybrid plans. Matrix plans may have a variety of different structures including 1 by M (single leg), 2 by M, 3 by M, and so forth up to and including matrices having infinite width and/or depth. Such a matrix may be identified as an N by M (or N×M) matrix where N represents the number of columns or legs in the matrix and M represents the number of rows or levels in the matrix. Other interrelated compensation plans may also result from breakaways. Some compensation plans may be hybrids including a combination of various features found in other discrete plans.
By way of example, the traditional “uni-level” plan is often considered the simplest of compensation plans. As the name suggests, the plan allows an Independent Distributor to sponsor one line of people, called a “frontline.” Every person the Independent Distributor sponsors is considered to be on that Independent Distributor's frontline and there are no width limitations, meaning there is no limit to the amount of people one can sponsor on his or her frontline. The common goal of this plan is to recruit a large number of frontline persons and then encourage them to do the same. This is due to the fact that commissions are normally paid out on a limited depth. For example, if a company uses a uni-level plan allowing commissions on sales 5 levels deep, the Independent Distributor can have an unlimited number of people on their frontline, but can be paid no more than 5 levels deep. Typically, an Independent Distributor must qualify to earn commissions on downline recruits.
In a further example, the traditional “matrix” is similar to a uni-level plan, except that there is a limited number of persons who can be placed on the first level. Accordingly, matrix plans typically have a structure that has a fixed “shape” that determines the size of the organization, or personal enroller genealogy, the Independent Distributor can be paid on. For example, if a company uses a 4×4 matrix, the Independent Distributor can have no more than 4 people on their frontline, and can be paid no more than 4 levels deep. If they already have 4 people on their frontline, any future people they enroll will have to be “placed” somewhere below those 4 frontline people in other open spots below them in the matrix. This is called “spillover.” Matrix plans often have a maximum width and depth. When all positions in an Independent Distributor's downline matrix are filled (maximum width and depth is reached for all participants in a matrix), a new matrix may be started. Like uni-level plans, Independent Distributors in a matrix may earn unlimited commissions on limited levels of volume after qualifying to do so.
As mentioned above, matrix plans limit the width of each level in an Independent Distributor's group, forcing successful recruiters to position their recruits under other people who did not recruit them (“spillover”). Spillover, therefore, can be viewed as either a curse or a blessing, with proponents saying it's a great way to cause people to help their downlines since recruits will automatically be placed below their downline distributors. Spillover also tends to keep people active, because they don't want to lose out on the recruits spilling over from their upline. Others argue that spillover rewards weak and non-performing Independent Distributors, because if an Independent Distributor is producing, they will already have people below them, causing new recruits to likely be placed in the “holes” under non-producers.
As mentioned above, traditional matrix plans may have a variety of different structures including 1 by M (single leg), 2 by M, 3 by M, and so forth up to and including matrices having infinite width and/or depth. The traditional “single leg” is a type of matrix plan with a structure that has a one-dimensional fixed “shape” that determines the group genealogy the Independent Distributor can be paid on. Specifically, in a single leg matrix, the number of persons who can be placed on the first level or frontline is exactly 1. Again, however, commissions are normally paid out on a limited depth. For example, if a company uses a 1×6 single leg matrix plan allowing commissions on sales 6 levels deep, the Independent Distributor can have no more than 1 person on their frontline, and can be paid no more than 6 levels deep. If they already have 1 person on their frontline, any future people they enroll will spillover to somewhere below that frontline person. Similarly, any future people enrolled by someone above the Independent Distributor will also spillover to somewhere below the Independent Distributor's frontline person.
As discussed above, single leg matrix plans limit the width of each level in an Independent Distributor's group to a single downline or leg, forcing every recruiter to position their recruits under other people who did not recruit them. As discussed above, such spillover can be viewed as either a curse or a blessing.
Other examples of network marketing compensation plans may include “binary” plans. A traditional binary plan is a multilevel marketing compensation plan which allows Independent Distributors to have only two frontline people. If an Independent Distributor sponsors more than two people, the additional people spillover. One advantage to binary plans is that new Independent Distributors generally need only sponsor two people to participate in the compensation plan. The primary limitation is that distributors must “balance” their two downline legs to receive commissions. Balancing legs typically requires that the number of sales from one downline leg constitute no more than a specified percentage of the Independent Distributor's total sales.
Another example of network marketing compensation plans may include “stairstep” or “step-level” plans. This type of plan is characterized as having Independent Distributors who are responsible for both personal and group sales volumes. Volume is created by recruiting and by retailing product. Various discounts or rebates may be paid to group leaders and a group leader may be any Independent Distributor with one or more downline recruits. Once predefined personal and/or “group volumes” are achieved, an Independent Distributor moves up a commission level. This continues until the Independent Distributor's sales volume reaches the top commission level and “breaks away” from their upline. From that point on, the Independent Distributor's group volume is no longer included in their sponsor's group volume. Breakaways are generally entitled to additional compensation, which is usually referred to as an “override.” Breakaway concepts can also be part of any or all of the network marketing compensation plans previously discussed.
In each of the traditional network marketing compensation plans discussed above, an Independent Distributor remains permanently in the original position into which they were recruited. In addition, in each of the traditional plans “breakage” may occur when unpaid commissions are retained by the company. Breakage may result when an Independent Distributor is either unqualified or ineligible to receive commissions, at or close to the top of the company genealogy, or is an “orphan” (an Independent Distributor who is not properly linked to the network structure).
The network marketing plans previously discussed typically have some provisions for paying commissions and incomes on the volume of sales made during a certain time period. There is typically a minimum group volume requirement for an Independent Distributor to qualify for these commissions. The number of levels of volume in the compensation plan the Independent Distributor is paid on and the percentages they receive are dependent on the company and the position they have reached. In a conventional matrix marketing plan the sales volume made by an Independent Distributor only benefits their direct personal and/or placement upline. In a conventional single leg matrix the sales volume made by an Independent Distributor typically benefits the entire placement upline.
Thus, while techniques currently exist that are used for implementing and managing retail customer referral compensation programs, challenges still exist. Accordingly, it would be an improvement in the art to augment or even replace current techniques with other techniques.